DPAPI is compatible with clustering, the way it would be set up is you would create all your web servers before DPAPI encrypting any key. Once you have your web servers set up you will then want to make sure that you have a backup of your key stored in a secure location. Now you are ready to DPAPI encrypt your keys by logging on the to each server under Administration>Configuration>Security. This will provide a different DPAPI encryption per each machine so that in the event of a system failure the original backup key will have to be used. Let me know if you have any questions.

When upgrading with DPAPI turned on in a clustered environment all the application files should be copied over to the other servers except the encryption key. Since each key will have its own DPAPI encryption they will not transfer over.